Poll:Prefer One, Two, or Three Legs?

[REWahoo]

I wonder how many pensionless people really would buy an annuity to create the third leg.

Not many of us I suppose. While it is something I consider for the future, the future never seems to arrive. I'm beginning to suspect I'll be dead by the time it gets here.

 

[aim-high]

Given the same amount of money, I would prefer just SS and personal savings.

The reason is that of the 3 only SS and personal savings are tax advantaged. The pension even interferes with the other two and make them more taxable.

To be more explicit, 15% of SS income is tax-free for everybody. It could be more if one was lower income. Of personal savings, return of capital is tax-free, Long-term capital gains may be tax-free, and qualified dividends may be tax-free. One can juggle all these to reduce one's income tax burden to essentially zero. However, if you throw in a pension, then it mucks up everything.

Very good points. Never thought of that.

 

[photoguy]

I know that different people have different perspectives, but for me option a) seems so obviously superior that I almost consider it borderline irrational to pick one of the alternatives.

As others have mentioned the more money you allocate to pensions and SS the harder it may be to ER early as it may be locked up.

The other drawbacks to pensions and SS are that you completely cutoff the upside on portfolio gains. At most I guess you could expect a COLA that matches inflation but even now with high PE10 the expected returns of the market is still higher than inflation.

With pensions and SS you also lose ability to manage your income. This may be important if you are near various cutoffs for ACA.

Finally, you also have less of a liquid stash (i.e. may be more difficult to buy a house in cash, etc.).

 

[Meadbh]

Two things:

1. Anyone who has Social Security at the beginning of retirement has not retired early.
2. This is aim-high's first post. How long will it take before the annuity ads commence?

 

[powerplay]

None of the options fit my situation. I retired with a COLA'd pension and am not eligible for SS. I haven't tapped any of my retirement accounts yet. My stool balances on 2 legs.

 

[NW-Bound]

The OP asked about preference, but some posters voted according to their actual situation.

Talk about want, why stop at 3? I would like something like a 4-legged stool please (a 5-legged stool would be weird!). But as it is, I am living on my savings, drawing from after-tax accounts first, then adding IRAs and 401k's in a couple of years. SS is anywhere from 5 years to more than 10 years down the road, depending on how we want to delay it.

So, instead of the 4-leg stool, right now I am balancing and hopping on a pogo stick. My portfolio does bounce like one for the last 15 years. When I can draw SS, it will be like walking on stilts. An improvement!

 

[Katsmeow]

Two things:

1. Anyone who has Social Security at the beginning of retirement has not retired early.
2. This is aim-high's first post. How long will it take before the annuity ads commence?

Aim-High has 92 posts and has been a member since August....

As for having SS at the start of retirement, DH was 62 when he retired. He certainly feels he retired early, since he had originally thought he would work until FRA which was 66 in his case. Of course, definitely a different situation than someone retiring at 45 for sure.

 

[Bestwifeever]

Two things:

1. Anyone who has Social Security at the beginning of retirement has not retired early.
2. This is aim-high's first post. How long will it take before the annuity ads commence?

I see aim-high has 92 posts -- this thread would have started with no. 88 or so?

 

[Meadbh]

Pardon me, I made an error. I mistook post #1 in the thread for post #1 of the poster. Still unfamiliar with the details of the new app. Apologies, aim-high!

 

[Katsmeow]

The OP asked about preference, but some posters voted according to their actual situation.

For some people we had a choice on this in our actual situation. That is, when DH retired he had the choice of receiving a pension or have receiving actuarily same lump sum which basically becomes like personal savings. In his case, he took the lump sum. (One problem I had with the poll was that it talks about a pension, but doesn't address the situation where one could take a lump sum).

 

[MooreBonds]

While I understand the many reasons to not prefer an annuity, when I reach 60-65, I definitely would look into some of the 'delayed' annuities, where you pay a lump sum now, and (if you're still alive) receive a giant payout starting at 80 or 85. It would solely be for longevity insurance.

Obviously, it would depend on the health of myself/future wife, as well as interest rates, economic climate, and my personal portfolio situation at that time.

In addition to providing portfolio insurance, it would also help reduce against making stupid moves due to senility interfering with investment decisions at that ripe old age, if I already have it 'locked in' to a certain degree and have one less thing to worry about.

But other than the longevity annuity insurance, I most likely will stick with personal portfolio + a bit from SS.

 

[timwalsh300]

Actually, when I said "I wish I had a (COLA'd federal) pension (w/health insurance), I am not saying that I wish I had been paid more and/or saved more for retirement. Rather, I am simply saying that I wish I had the additional security and peace of mind that a pension would provide, especially a federal pension w/COLA.

Then go convert your savings by purchasing one. I guess it wouldn't be "federal," but a contract with a private insurance company for a COLA'd SPIA might actually be safer than what military personnel have, as evidenced by the recent legislative actions.

Tim

 

[Midpack]

Seems an odd poll, why would anyone choose other than option A - everything? Soc Sec and pensions (where offered) aren't really optional, IOW who would turn either down if available? And it appears most folks are voting for what they'd like while others are voting what they actually have...

 

[FIREd]

I would prefer 3 legs, however we won't have a pension. For now, I replaced that missing third leg with rental real estate. I'm thinking that, eventually, I might sell the rentals and buy a SPIA to create a pension-like stream of income.

 

[W2R]

I guess I have a 5-legged stool in my plan:

1. federal FERS pension
2. TSP (essentially 401K) savings, which are in the G Fund that cannot lose share price value, and from which I am taking equal monthly payments. This is sort of like a second pension.
3. taxable investments
4. social security, not yet claimed
5. Possibly a small SPIA to supplement the above, to be purchased when I am in my 80's

One of my goals when planning my retirement, was to get a number of different income streams from different sources in place. I think of this as diversification in income sources, which I think is desirable as well as diversification in my investment portfolio.

With many income streams from different sources, I can survive even if one of them goes belly up. I can't even articulate how much this sort of approach helps a worrier like me. It has helped me to relax and enjoy my retirement.

 

[Katsmeow]

Seems an odd poll, why would anyone choose other than option A - everything? Soc Sec and pensions (where offered) aren't really optional, IOW who would turn either down if available? And it appears most folks are voting for what they'd like while others are voting what they actually have...

Because the value of each in the poll are the same. Would you rather have $1M in personal savings or would you rather have $333k NPV SS, $333k NPV pension and $333k savings? It seems to me that people could easily choose the first rather than the latter.

 

[daylatedollarshort]

When I retired, I had a choice of a flat sum or pension. I decided on the pension. I liked the idea of a reliable income (although as you know it comes with a risk that the pension is not funded). I also remember reading, although I can't remember where, that people with pensions/annuities are healthier in retirement.

We have several pensions, and so far took two as annuities. I do think LOL has a good point about taxes, but we liked the diversification and some steady income along with SS if we ever both get dementia. PLus the ones we took so far are from different companies and under the PBGC limits so they provide a very unique income stream compared to the portfolio savings in our Fidelity / Vanguard type accounts.

The pensions do not cover a large percent of our expenses now, but will cover more as a percent once the kids are out of college, and we downsize and/or move to a lower cost of living area.

We also will keep two lap top hobby businesses going as long as we can. The extra income is nice plus they have great tax deductions (health insurance, computer expenses, business travel that could be a conference in London or Paris, etc. )

And I am learning all the little sign up bonuses / CC rewards / frequent flyer hacks for extra cash and free travel, which I am hoping will add another $5 - $10K a year in cash and travel equivalents.

 

[anethum]

Then go convert your savings by purchasing one. I guess it wouldn't be "federal," but a contract with a private insurance company for a COLA'd SPIA might actually be safer than what military personnel have, as evidenced by the recent legislative actions.

Tim

Right, it wouldn't be federal, and would therefore have potential risks which others have noted above. And of course, it wouldn't come with free health insurance that federal retirement brings.

As for the military pension change, I believe that it reduces the COLA to 1% below inflation until age 62. That's a reasonable change for what is a very generous system. It may very well be restored by Congress, anyway. (I would support restoring it for disability retirements only.) Compare that minor change to what has been happening in private industry for the past 25 years, where pension plans have been completely disappearing overnight, as happened to me.

 

[Alan]

My preference was to retire in my 50's (made it out at 55) so that actually rules out SS at the beginning.

We have been living with pension and savings for the last 4 years, then we'll add leg number 3 with DW's SS in 3 years.

 

[karluk]

Because the value of each in the poll are the same. Would you rather have $1M in personal savings or would you rather have $333k NPV SS, $333k NPV pension and $333k savings? It seems to me that people could easily choose the first rather than the latter.

The NPV is only the same for each option if the recipient dies exactly on the date predicted by his or her average life expectancy. If that unlikely event fails to transpire, the NPV of savings is better if actual lifespan is shorter than average, while NPV of SS and pensions is better if actual lifespan is longer than average. Unless the recipient is a compulsive gambler and likes to bet just for the sake of betting, the rational choice is to have half of the NPV of one's assets in a combination of SS and pensions and the other half in personal savings. Your suggestion of splitting things up with 1/3 in each is biased towards expecting an unusually long lifespan, so it's not the optimal choice.

Since most people on this forum have considerable savings that is most likely worth more than the NPV of their SS benefits, a pension (if available) is a great way to equalize things so you don't end up unwittingly making bets either for or against your own longevity.

 

[arky]

Given the same amount of money, I would prefer just SS and personal savings.

The reason is that of the 3 only SS and personal savings are tax advantaged. The pension even interferes with the other two and make them more taxable.

To be more explicit, 15% of SS income is tax-free for everybody. It could be more if one was lower income. Of personal savings, return of capital is tax-free, Long-term capital gains may be tax-free, and qualified dividends may be tax-free. One can juggle all these to reduce one's income tax burden to essentially zero. However, if you throw in a pension, then it mucks up everything.

This obviously needs to be considered on a case-by-case basis, but in general, if the "safeness" of all income streams is equal, I'll take three streams vs two, even if the total is the same to start with.

 

[samclem]

And of course, it wouldn't come with free health insurance that federal retirement brings.

One of the wonders of the Internet is that it only takes a few seconds to inform ourselves. Federal government retirees receive no free health insurance. And they receive no free insurance while they are employees, either. In all cases they pay premiums.

As for the military pension change, I believe that it reduces the COLA to 1% below inflation until age 62. That's a reasonable change for what is a very generous system. . . . Compare that minor change to what has been happening in private industry for the past 25 years, where pension plans have been completely disappearing overnight, as happened to me.

I'm sorry that the promise made to you by your company was not kept. That's hardly a reason to wish the same fate for others.

 

[youbet]

Compare that minor change to what has been happening in private industry for the past 25 years, where pension plans have been completely disappearing overnight, as happened to me.

Did your company go bankrupt? I don't know of any private pension plans that "completely disappeared overnight" in the past 25 years. Some closed to new credits/earnings but I think all still maintained credits already earned or pensions already being paid unless they declared bankruptcy. Even then, the PBGC covered all or most of what the annuitant was to receive.

It's gov't pensions (think Illinois or the military) where the already earned pensions of annuitants are being reduced.

 

[anethum]

One of the wonders of the Internet is that it only takes a few seconds to inform ourselves. Federal government retirees receive no free health insurance. And they receive no free insurance while they are employees, either. In all cases they pay premiums.


I'm sorry that the promise made to you by your company was not kept. That's hardly a reason to wish the same fate for others.

Thank you for the correction. However, there are heavy subsidies. Federal workers have had and continue to have access to health insurance plans at out-of-pocket rates which would be the envy of many workers in the private sector. When is the last time anyone heard of a retired federal worker learning that their retiree health insurance is going away? It is increasingly happening with non-federal retirees who were lucky enough to have it provided by their former employer in the first place.

I never said I wished the same fate on others. Please do not put words into my mouth. I do think, however, that a reduction in a COLA for a federal pension is hardly the same thing as the complete and sudden elimination of a pension plan.

I have many friends who are federal employees and a few who are retired federal employees. Most have only worked for the federal government and don't really have an understanding of what the work environment is for everyone else. Many of them have a sense of entitlement concerning their very generous benefits.

 

[anethum]

Did your company go bankrupt? I don't know of any private pension plans that "completely disappeared overnight" in the past 25 years. Some closed to new credits/earnings but I think all still maintained credits already earned or pensions already being paid unless they declared bankruptcy. Even then, the PBGC covered all or most of what the annuitant was to receive.

Megacorps have been converting from defined benefit plans to defined contribution plans for years. (The megacorp that suddenly ended my pension plan already had a defined contribution plan which I participated in, because as I said above, I was diligent about saving for retirement.) Those already retired continued to receive their pensions. Those who were eligible to retire but who hadn't yet retired weren't screwed, but I don't recall the details. I do recall that there was quite an upward cliff for those who were eligible to retire. The rest of us got a fairly paltry payout. I rolled mine over to an IRA. It could have been worse; I could have been much closer to retirement.